There are new signs of a resilient housing market and a home renovation rebirth with potentially bullish implications for three of our Club names. Shares of Stanley Black & Decker (SWK) and Caterpillar (CAT), whose tools and machinery are used in homebuilding, have been on the upswing in recent weeks. Additionally, after a lull in Covid-driven renovations, many would-be buyers stuck in their homes due to a housing shortage as well as higher prices and mortgages rating are choosing to upgrade their current digs. Stanley Black & Decker’s brands appeal to Do-It-Yourself (DIY) folks as well as pro contractors and builders. On the decorating side for new homes and after renovations, TJX Companies’ (TJX) HomeGoods chain stands to benefit even more than during the pandemic because rival Bed Bath & Beyond went bankrupt. Shares of SWK and CAT were trading up about 18% and 14%, respectively, over the past month. TJX stock was up 7% over the same period, touching an all-time high Wednesday. Here’s the data supporting our conviction: Sales of new homes rose 12.2% in May month-over-month, to a seasonally adjusted annual rate of 763,000, the Commerce Department said Tuesday. That’s the highest level since February 2022. Home prices ticked 0.5% higher month to month in April, according to the S & P CoreLogic Case-Shiller national home price index. It’s the third straight month of increases after peaking last June. Consumer confidence improved more than expected in June, the Conference Board reported Tuesday, logging its highest level since January 2022. “Historically speaking there tends to be tight linkages between SWK’s stock price performance and fluctuations in consumer confidence and trends in residential-related end-markets,” said Brett Linzey, analyst at Mizuho Securities. “More than 80% of products sold by the company serve consumer-related markets or categories.” According to a recent Repair/Remodel survey by JPMorgan, 84% of respondents plan to do some type of repair/remodel project on their home over the next six months. The survey indicated 63% of the projects are expected to be DIY while the remaining 37% are expected to be done by a professional contractor. Stanley is a global leader in hand and power tools and household hardware, the kind of equipment needed to complete home renovations. Heavy equipment manufacturer Caterpillar, which generates 25% of its construction revenue from residential, should also see growth in its segment as North America construction sales continue to be strong, according to the company. Caterpillar mostly supports large-scale projects with 75% of its construction revenue coming from non-residential. But, as residential building permits increase, there should be sustained demand for CAT’s machines. Caterpillar’s Construction Industries segment represents about 40% of total company sales. “The housing market is an example of an industrial activity that could benefit Caterpillar across most of their businesses,” said Michael Shlisky, analyst at D.A. Davidson. It’s a bonus for us as CAT shareholders whose core investment thesis is around government spending earmarked to update the nation’s infrastructure. A new housing development, Shlisky said, could require roads, sewers, electric and water connections to be built, projects that require CAT’s technology and heavy-duty equipment. “There are a lot of projects that go on top of residential construction that require mining materials, which Caterpillar is a big player in.” To be sure, high mortgage rates are trapping many Americans in their current homes while keeping renters, who may want to wait for the cost of homeownership to come down, temporarily out of the market. Consumers have come to accept this “new normal that is formed in the wake of the Federal Reserve’s aggressive interest rate hikes starting last year,” said Stuart Millar, executive chairman at Lennar , during the company’s second-quarter earnings call. The huge imbalance between available housing and demand is expected to stick around for a while, keeping residential homebuilders, like Lennar, busy. “Supply is short, demand is returning to affordable offerings and builders will need to produce more homes to fill the void,” Miller said. Lennar was among the U.S. homebuilders that hit an all-time Wednesday. Bottom line The strong growth of the housing trade is a positive read-through to our holdings Stanley Black & Decker and Caterpillar, as well as TJX due to its ownership of the HomeGoods chain. SWK is a solid home improvement play because homeowners think of their homes as an investment and are willing to put in the capital that’s needed to increase their value. Since mortgage rates are high right now people are taking the time to do the proper repairs needed so when they choose to sell, they can get a better price. Stanley should be a huge winner here since its tools and outdoors businesses are its bread and butter. And, of course, Stanley Black & Decker brands are used in new home construction, too. For Caterpillar, as long as there is continued demand for new homes and more construction is needed, we expect the demand for its equipment to be high for years to come. We expect infrastructure to be one of the fastest-growing sectors for construction driven by government stimulus. We also like how CAT is a strong producer of free cash flow that prioritizes return-of-capital to shareholders. We own CAT primarily for the expected influx of business once the federal infrastructure funds kick in next year. We expect earnings in 2024 to be higher than this year’s levels, and we find merit in the expectation for residential segment growth as well. Discounter retailer TJX should also reap the benefits of a resilient housing market as new and existing homeowners seek to furnish their homes with high-quality branded goods at a discount. The off-price retailer, which also owns T.J. Maxx and Marshalls, is also the place to go for bargain hunting on clothes, shoes and apparel. (Jim Cramer’s Charitable Trust is long SWK, CAT, TJX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
There are new signs of a resilient housing market and a home renovation rebirth with potentially bullish implications for three of our Club names.